Netflix Moves Fast, but at What Price?

In these recessionary times, the stock market doesn’t get nearly the attention that it did back in 1997 when Netflix was founded and every dotcom was looking for a big initial public offering. But if you’re the head of a publicly traded company stock price still matters a lot.

Just ask Reed Hastings, the CEO and co-founder of Netflix. On Sunday, he attempted to address the decline in stock value his company has undergone since announcing a new pricing structure in July. Following what’s become the standard social media playbook for restoring customer trust after a corporate blunder, he wrote a post that sought to be contrite about past mistakes and transparent about future plans.

The result? On Monday Netflix stock dropped a whopping 7.37% on a day when the exchange it’s traded on only dropped 0.36%.

On second thought, maybe that blog post didn’t actually matter since the last three days of trading saw Netflix stock drop 31.56%. That’s part of a total decrease in stock value of 43.36% since the company announced its new pricing scheme. Granted, this time period includes some big drops in the the composite stock indexes too, but nothing approaching the drubbing Netflix has taken.

Before July, it looked like Netflix had sewn up the market it pioneered by freeing customers from trips to the video rental store. Now, it doesn’t seem unreasonable to ask if the recent missteps have permanently damaged the company’s future as its customers air their displeasure. Even worse for Netflix many of them seem to be leaving in protest, perhaps sampling competing services from Apple and Amazon.

What exactly did Netflix do? First, they raised prices for the popular 1 DVD at a time rental plus unlimited streaming plan by 60%, from $9.99 a month to $15.98. That’s when the first signs of customer revolt started.

Personally speaking, I wasn’t especially concerned about the increase. Yes the percentage was large but the dollar amounts were still fairly small and many of the complaints I heard reminded me of comedian Louis CK’s rant “Everything is Amazing Right Now and Nobody’s Happy”, in which he skewers the human sense of entitlement for things such as complaining about the hassles of air travel instead of appreciating the miracle of flight.

16 bucks a month for unlimited access to Netflix’s streaming library, plus the ability to get DVDs not available online delivered to my mailbox? Amazing! It seemed Netflix was moving us rapidly towards the magical world of “Any Movie Ever Made” that was portrayed in a TV commercial for Qwest broadband 12 years before.

Apparently not everyone shared my lack of concern over the price jump. On September 15, the company issued a note to shareholders (PDF) that warned it was revising its growth projections. In fact it wasn’t projecting growth at all, but actually acknowledging that in the wake of the price increase, Netflix had lost a million customers. Of course a million is a lot, but the company still has more than 20 million who haven’t left. Even if Hastings isn’t worrying about the lost customers, he has to be worried about the lost stock value that has gone with them.

This was the context for Hastings’ blog post of September 18, which was addressed to customers, but more likely intended to appease shareholders by explaining that the price increase was actually just preparation for the company’s masterstroke of splitting itself in two.

…streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It’s hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to “Qwikster”.

…

A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places.

Remarkably, the company that realized there were enormous amounts of money to be made in removing the hassle of driving to the video store to rent a movie now thinks that its future depends on making its own service less convenient for customers. My own experience working on a large e-commerce site was that the business’ needs always press for greater data integration leading to better customer experience. This is why Customer Relationship Management (CRM) software companies flourish — they help retailers do the exact opposite of what Netflix wants to do.

Most business thinkers would look at their customers who only rent DVDs and see them as future streaming customers. Netflix seems to see them as so set in their ways so they’d rather create another company just for them. It flies in the face of what successful e-commerce companies do.

Has Reed Hastings made a terrible mistake? Or could it be he is the ultimate online commerce grandmaster? Either way, this might be a business case study that MBA students study for years to come. My money (figuratively speaking) is on this being a terrible mistake.

The reason CRM is such big business is that for a company like Netflix information about its customers is its most valuable asset. Even if Netflix and Qwikster share data, it will only be sharing. As the post makes clear, they will be run as two separate operations, requiring maintenance of two different accounts if you want the option of either renting DVDs or watching streaming video. And you’ll have to do two different searches, instead of simply doing one search and seeing if a given film is available for streaming, on DVD or both.

At this point, I’m no longer thinking Netflix is so amazing, even though, as a practical matter, there’s not much downside for me in the new plan. I tend to get one movie on DVD and then let it sit unwatched for a year. Meanwhile, my family watches at least an hour of streaming Netflix video most nights, usually more. What bothers me is that my access to easy choice has been removed. Even though I rarely used the DVDs, I now have to intentionally choose to use them or not use them in my search for entertainment. I rarely chew gum either, but that doesn’t mean the local grocery story should take it out of the impulse purchase racks by checkout, and build a separate store next door just to sell gum.

So, if I continue with Netflix, I probably won’t sign up for Qwikster (apparently it’s still 1997 in the mind of whoever thought of that name). But I’m surprised at how much I resent having the decision about not renting DVDs made for me instead of being allowed to make it myself.

What could possibly have prompted such a seemingly irrational business decision? The answer is right there in Hasting’s post:

For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.

Reed Hastings is scared. But he’s not scared of competing businesses. He’s scared of himself. He’s afraid that if he doesn’t separate himself from the company he built — DVD rentals by mail — he won’t be able to focus on the company he’s building — streaming video on demand. He’s afraid that in a world where fast moving companies try to take down slow moving ones, Netflix was in danger of becoming slow.

Maybe Hastings is right. Maybe he knows something the rest of us don’t and time will reveal all. But at this point the stock market is betting against his leadership and so am I. Moving fast in a clear direction is smart business. Moving fast randomly because you feel like you need to move or something bad will happen is a psychological issue that’s likely to give stockholders good reason to make some fast moves of their own.

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17 Comments

John Wilkinson says:September 20, 2011 at 1:32 pm

I don’t know how Netflix informed customers about the price increase. Evidently I missed it among the blizzard of unwanted communications I get every day. I only became aware of the increase when the News coverage made me to look at the details of my Credit card statement; they had nearly doubled the amount taken, without seeking my permission. This is what I found infuriating, not the new dollar amount.

We will probably cancel the dvd rental and may cancel the streaming as well. We have many other options to subscribe or get movies from through our Media player. We really enjoyed the service Netflix has offered. Because it was so smooth – us the customers were the best walking commercials any company could ask for. The company’s decision to increase the rate substantially just leaves a sickening feeling and a reason to want to look for the service elsewhere.

I have been with Netflix from just about day 1. I looked at my statement today and they doubled my rates I called and they just did not even care. I feel that most companies grandfather the original customers over but not in this case. I have at this time canceled all my services not because the price but because I was told that the streaming titles will not or ever have new releases then what’s the point. I will try and fond another service at what ever the price. Too bad

With the price increase & removal of receiving dvds through the mail, will we be able to stream recently released movies? The movies which Netflix offers now are older movies not current movies. What are you offering you loyal customers besides a major price increase?

I cancelled the DVD by mail service in August, merely annoyed at the price increase. I was more interested in streaming despite the limited selection. Nextflix would surely bolster their streaming offerings in the very near future since this was clearly their preferred business model. But when Hastings issued his “apology”, I was simply insulted. I desire on-demand streaming but I don’t need it, and I’ll be damned if I’m going to take a price hike and an insult from a rich CEO with absolutely no added value in return. This was just the motivation I needed to extricate myself from this business and put my $10 a month to a better use.

Netflix is just greedy with the price hike they are just making more money(do u blame them) my only issue is offer me something more. I’m getting the same product for more money offer me a roku box or something so I can give my kid her wii back……lol.

Alex, there are good reasons to be suspicious of any business decision made just to please shareholders, especially if you are a journalist. But on the other hand, when you’re in a publicly-traded company your shareholders are the people who have invested in your company to help you grow it, and in my mind you do have a certain ethical obligation not to do stupid things with their money.

In this case, Netflix’s stock price is standing in as a proxy for Netflix’s customers. Investors think the company is treating its customers poorly and they are punishing it financially for it. A <5% drop in subscribers tells us what people thought of Netflix's past actions, but that drop in stock price (49.34% as of today) tells us what people think of Netflix's future.

Great post Brook, one comment though: The elephant in the room that no one seems to be talking about is the providers. Hollywood is notorious for playing hardball with distribution, and as the most successful of the new digital distribution channels, Netflix has been repeatedly strong-armed by content companies that are understandably frightened about handing too much control over to Netflix.

The well publicized exodus of Starz from the Netflix service earlier this year was merely one more in a long list of compromising situations that Hastings and company have found themselves in because of Hollywood. Everyone likely remembers the 28 day waiting period that that the studios forced onto them in an attempt to capitalize on DVD sales to impatient consumers. It’s likely that both ends of Netflix business were being compromised in order to please the studios. By splitting the DVD rental and streaming services into separate entities, neither service can be used as a pawn against the other. Each is free to negotiate on its own merits.

It’s true that in the short term the consumer loses in this scenario. But in the long term it’s likely that the split will allow both Netflix and Qwickster to secure better business deals, and make independent investments in their own best interests.

Hastings isn’t afraid of his own inability to make the leap to digital distribution. (By letting the streaming service keep the name Netflix he’s shown that decision has already been made.) What he is afraid of is having his business bullied into irrelevance by an industry that’s refusing to make the leap itself.

The price hike didn’t bother me. Inflation is expected these days, and even though it’s a big jump, I still thought it was a decent deal to have DVDs delivered to my door, especially considering how many videos I go through in a month. – And yes I still use DVDs. and I still have a VCR, too. I’ve streamed 4 videos in 6 years of membership.-

It was the “apology” that ticked me off and made me reconsider.

It wasn’t even a real apology as much as a list of other things they were planning to do to lose customers. “We’re going to raise prices AND make it less convenient to use.”

Those are some really great points, Joe. When you look at it from that perspective, it seems like maybe where Hastings really screwed up was in not taking a cue from Steve Jobs and going straight to the customer with his frustration about the limits imposed by the suppliers.

Jobs wrote a letter to iTunes users laying out his objections to digital rights management the way his own product was forced to implement it by the record companies. He won that battle very quickly after taking it public.

If Hastings is in a similar battle with movie studios, then the apparent transparency in his recent post is actually not transparency at all, but obfuscation that makes his position weaker instead of stronger. It’s still a stunningly bad misplay.

Bad form aside, isn’t Netflix just positioning to benefit from the data mining aspect of the streaming business? There are privacy restrictions on physical DVD rental companies’ use of data that are not extant for online services. Maybe Hastings attended a Facebook seminar an learned that the way forward is 1) Subscriber Affront; 2) hackneyed apology; 3) backpedal; 4) repeat. Amounts to a 2 steps forward, 1 step back.

Funny that Netflix claims everyone was notified of prices increases. I too only found out after seeing the charge on my credit card as I use auto-pay. A 100% increase for a couple of 2+ year old DVDs a month is ridiculous. I dropped my plan down to streaming only, only because my TV and WDLive box has Netflix built in, which I love the convenience of.
For physical DVDs, I guess it is Redbox only for me now. I get 4+ free movies per month using their promo codes they text each week. I can see that Netflix is going to lose their DVD by mail market very shortly. Perhaps that is their plan.

My main complaint is not the increase itself, but the increase and charge without any customer knowledge!

There has been a lot written about the company’s recent changes in services and the resulting exodus of customers and decline in stock value. I’m suggesting here that there is another major factor in this ongoing saga. That is the apparent lack of interest or effort by the company to investigate its customer’s concerns.

They missed an opportunity to really partner with their customer base and involve them in the plans for how their services would change. By not involving their customers in these sweeping changes they sent an unintended negative message. That message seemed to be “We care more about our business strategy and profits than your input, inconvenience and increased costs.”

In Story Teller Uprising Hanson Hosein talks about how trust is an act of transferring resources from the trustor to the trustee. Netflix’s behavior as a trustee resulted in a loss of trust and social capital it had built up over time in providing economical and dependable service. They certainly underestimated the backlash to these changes. And their feeble attempts at contrition without acknowledgement, compromise or recompense have come across as insincere and manipulative, further alienating customers.